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  • Writer's pictureSamuel Chao

A Deep Dive Into Landfill Waste-to-RNG Project Financials

Updated: Nov 1, 2023



Fossil fuel natural gas is under attack.


Over 100 jurisdictions in the United States already have legislation that bans natural gas hookups in new homes. New pipelines are becoming more and more difficult to build, primarily due to environmental and community opposition.


Despite these difficult challenges, the natural gas sector is still well positioned to bridge reliability and affordability challenges faced by our current energy transition to electrify everything.

In the near term, the electric grid lacks sufficient capacity to meet future energy demand forecasts. While the world races to expand and upgrade the electric infrastructure, natural gas as an energy source can better decarbonize certain sectors, such as long-haul transportation and heavy industry. Furthermore, we already have a reliable and extensive network of gas pipelines across and within the country. Gas utilities can leverage both their existing infrastructure as well as recently earmarked government incentives to produce renewable natural gas (RNG). RNG projects have an opportunity to optimize ROI while developing a robust decarbonization strategy to serve as a bridge to a sustainable future.


What is RNG (Renewable Natural Gas)?

According to the EPA (Environmental Protection Agency), RNG is a term used to describe biogas that has been upgraded for use in place of fossil natural gas.


What is unique about RNG compared to other forms of clean energy is that RNG takes a product that is negatively impacting the environment, waste, and turns it into a clean and reliable source of energy.

The biogas used to produce RNG can come from many sources, such as solid waste landfills, wastewater treatment plants, livestock farms, and food waste.



In this week’s blog, I will dive deeper into landfill waste-to-RNG project financials and some key considerations when evaluating the economics of a project’s business case. Here are the major components of any RNG project:

  • Feedstock agreements (gas rights)

  • Offtake agreements

  • Permits (local and environmental)

  • Technology selection

  • EPC contractor

  • Operations and maintenance (O&M) plan

  • Pipeline interconnection

Assuming a plan is already in place to address the components above, let’s take a closer look at the elements that drive the financials of a landfill RNG project, broken down into five categories:


Capital Investment

CAPEX elements encompass a range of key components, including Engineering, Procurement, and Construction (EPC), which covers the cost of designing, procuring equipment, and constructing the RNG facility.


Gas and electric interconnection expenses involve connecting the RNG plant to the gas pipeline and electric grids.


Development costs include permitting, land acquisition, and feasibility studies necessary to start the project.


Commissioning and startup expenses are essential for the final phase, ensuring the plant operates effectively and efficiently before the official handover to operations.


Lastly, the contingency bucket is reserved for unforeseen challenges and cost overruns, serving as a safety net for the project's financial viability. These CAPEX elements collectively shape the financial foundation of an RNG project, ensuring its ability to generate sustainable and clean energy from waste sources.


Revenue

The years of operations play a significant role as they determine the project's long-term revenue potential. A longer operational lifespan ensures sustained income from RNG production, provided the landfill’s gas output isn’t at the end of its lifecycle.


The gas curve and efficiency factor into the revenue equation by influencing the amount of RNG produced and its overall market value. Higher efficiency and a favorable gas curve can increase revenue by maximizing gas yields. Furthermore, environmental attributes, such as carbon credits and renewable energy certificates, also known as RINs, contribute to the primary income stream of RNG projects, reflecting the environmental benefits of producing clean energy and reducing greenhouse gas emissions. These revenue elements, when well-managed, can make RNG projects economically rewarding while also benefiting the environment.


Cost of Goods

The cost of goods sold comprises several key elements.


First, the landfill authority revenue share represents a significant expense, as it involves sharing a portion of the RNG project's revenue with the landfill where organic waste is sourced. This revenue-sharing arrangement compensates the landfill for providing the feedstock and land necessary for RNG production.


Secondly, broker fees add to the overall cost of goods sold, as they cover the expenses associated with intermediaries or brokers who facilitate the sale and distribution of RNG to end-users. Effective management of these cost elements is essential in controlling the overall operational expenses and ensuring the financial viability of the RNG project. More importantly, offering the optimal share of these project revenues will likely determine whether you win or lose the opportunity to develop the RNG project.


Operating Expenses

Operating expenses in an RNG project encompass a couple of essential elements.


First, Operations and Maintenance (O&M) costs are a significant component, covering expenses related to the day-to-day management, upkeep, and monitoring of the RNG facility. A proper O&M plan ensures the efficient and reliable operation of the plant.


Another critical element is the electricity requirements, which are necessary for running equipment, compressors, and other energy-intensive processes within the RNG facility. Minimizing electricity costs through optimizing energy-efficient technologies can be pivotal in controlling overall operating expenses and enhancing the project's financial sustainability. Efficient management of both O&M and electricity expenses is vital for the long-term success of an RNG project.


Other Considerations

Several other elements can significantly impact the business case for an RNG project.


Debt financing is a critical factor, as it affects the project's capital structure and financial risk. Prudent management of debt can enhance the project's profitability.


Investment tax credits can provide substantial financial incentives for RNG projects by reducing tax liabilities, making them more attractive to investors. Recently passed legislation, such as the Infrastructure Investment and Jobs Act in 2021 and the Inflation Reduction Act of 2022 include incentives of up to 30%-40%+ for RNG projects that start construction before 2025.


Additionally, terminal value, which represents the projected value of the project at the end of its lifespan, through the sale of a project’s operations, equipment, or both, is a vital consideration. A terminal value can increase the overall attractiveness of the project by accounting for potential future revenues and asset values. These elements collectively shape the financial landscape of an RNG project, influencing its feasibility and success in the renewable energy market.


In conclusion, the success of an RNG project is influenced by a complex interplay of factors spanning both costs and revenues. CAPEX is pivotal for the project's initiation and includes elements like EPC, interconnection, and contingency, which must be managed effectively. Revenue elements, including the project's operational lifespan, gas curve, and environmental attributes, are essential in determining its long-term financial viability. Additionally, operating expenses, such as O&M and electricity requirements, directly impact the ongoing costs of the project. Beyond these, other factors like debt financing, investment tax credits, and terminal values can have a significant influence on the project's business case, affecting its attractiveness to investors and overall financial sustainability. Careful management of these elements is crucial for ensuring the successful development and operation of an RNG project.

 

This post was written by Sam Chao, Partner at THAMPICO LLC, a consulting firm that provides program and project management support for utilities and cooperatives. We help our clients align people, process, and technology to produce optimal outcomes for energy project development. Our goal is to help our clients deliver more reliable, affordable, and clean energy, which is what the world wants and needs.

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